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As the end of the financial year approaches, it's important to be aware of your responsibilities regarding tips. Tips may seem insignificant because of their small amounts, some employees across the country can earn a substantial income from them throughout the year. Therefore, it's essential to keep track of your tips, as they can add up over 12 months and represent a significant portion of your income.
It's important to note that tips, or gratuities, are taxable according to the Australian Taxation Office (ATO). Whether you receive tips directly from customers or from your employer, you must declare them as taxable income and keep a manual record of them. This is necessary for reporting them when filing your tax return.
When someone gives extra money to a service provider as a way of showing appreciation for their work, that's what we call a tip. Usually, businesses have a jar or box where customers can leave their tips, which are then shared equally among the staff. However, sometimes customers prefer to give the tip directly to the person who served them. While these situations are less common, they still count as tips.
In Australia, there aren't many variations when it comes to tipping, so these are the two most likely scenarios you'll encounter.
In Australia, the act of tipping is not widely practiced, resulting in few established methods for collecting tips. It's uncommon for customers to add extra payment to their bill in a restaurant or for the POS system to have a tipping option. This is because most POS systems are not configured for tipping, particularly with electronic payments.
Interestingly, the most common method of tipping is by leaving money in a jar placed on the counter. At the end of the day or week, the tips are then evenly distributed among the staff based on the hours they worked. Although this may seem unfair, since a customer may have tipped because of a particular employee's exceptional service, it's the usual practice for most Australian businesses.
Another alternative is for businesses with a system that allows them to determine which staff member worked on a specific table to have a POS system that enables tipping and reporting on who earned those tips. Staff members will benefit from this method since the tips will be included in their pay, making it simpler for them to keep track of their earnings. However, there is no obligation for employers to include tips as income on their employees' payment summaries.
As an employee, it is important to note that tips must be reported to the ATO, and this should be done through your annual tax return. Despite the unusual rule that tips paid through your employer do not need to be included in your income payment summary, it is still your personal responsibility to declare them as income. Although it may be difficult to manage due to the small amounts and cash payments, you must maintain accurate records of your tips.
If your employer collects all the tips and includes your share in your regular wages, keeping track of your tips becomes a little easier. However, it's important to review your payslip to ensure that the taxable income appears on it. If not, you will need to record the tips separately since they won't be included in your annual payment summary.
As an employer, there are several responsibilities to consider regarding tips, particularly if you collect and distribute them on behalf of your staff. To avoid any confusion, many businesses choose to handle tips separately from their regular payroll process. This is the most effective approach, as it eliminates any potential for misunderstandings.
Employers are not required to report their employees’ tips as a PAYG deduction or include them in their payment summary. As a result, it is recommended to keep tips apart from payroll. While keeping records of tips that are paid to staff is not mandatory, it is advisable to keep receipts or records of how much is distributed to each employee.
When tips are collected on behalf of staff and distributed, they don't need to be reported as income or subject to GST, as they don't enter the business. In the case of a tip jar, it's merely extra cash given to employees.
However, if the money is kept as income without passing it on to staff, it becomes income for the business and must be reported in BAS and financials. It's best to keep the management of tips simple, such as using a tip jar and splitting the cash among staff at the end of a shift.
Nonetheless, employees must keep records of their tip income in this scenario.
If you're unsure about your obligations as an employer or employee, it's always a good idea to consult with an accountant or financial professional. RJS Professionals can help you understand the regulations and provide guidance on how to manage tips in a way that is both compliant and beneficial for your business.
We can also assist with keeping accurate records of tips, which can be helpful in case of an audit or other financial review. We can also advise on any tax implications of tips and ensure that you are fulfilling your obligations to the ATO.
Consulting an accountant can provide valuable expertise and peace of mind when it comes to managing your finances an/or your business.
This article is published by R J Sanderson and Associates Pty Ltd ABN 71 060 299 783. This article contains general information only and is not intended to represent specific personal advice (Accounting, taxation, financial or credit). No individual personal circumstances have been taken into consideration for the preparation of this material. It is recommended that you obtain your own personal professional advice before making any financial or business decision.